Gary Hamel: The Future of ManagementJustifiably cited by an Amazon editorial panel as one of the top 10 business books of 2007 (along with our own "Firms of Endearment." Hamel's book presents an insightful perspective on the corporation of the future. (*****)

Gene D. Cohen: The Mature MindDestroys the fable that older minds are disadvantaged minds and gives the marketing community a lot to think about when it comes to creating communications for second half markets. (*****)

Joel Garreau: Radical EvolutionOne of the best ways to prepare for a future of previously almost unimaginable advancements in human abilities is by reading this book. This is not speculation. It’s already happening. You need this book to figure how you fit into the picture. (*****)

The Empty CradleA must, must read if you want a glimpse of economic conditions that marketers -- both local and global -- will have to deal with in the not-too-distant future. (*****)

November 29, 2010

Why Isn't Building Shareholder Wealth a Valid Corporate Purpose?

You better watch out, You better not cry, Better not pout, I'm telling you why: Santa Claus is coming to town. He's making a list, And checking it twice; Gonna find out Who's naughty and nice. Santa Claus is coming to town.

It’s that time of year, when at least when I was a kid you best minded your p’s and q’s lest the red-capped visitor soon to arrive from the North Pole leave you a lump of coal instead of a shiny new toy.

A lot of business writers are going about warning companies to mind their social responsibilities if they want to avoid being paid in lumps of coal. As co-author of Firms of Endearment, a recent bestseller dealing with the issue of corporate morality, I want to tell you why much of what people who promote the doctrine of corporate social responsibility is misdirected.

Let’s start with the first two sentences of Firms of Endearment:

This book is not about corporate social responsibility. It is about sound management.

We started the book with those two sentences because we believed that a moral platform is generally not a strong strategic platform for building and growing a company.

Nobel economist Milton Friedman said – infamously so in many people’s minds – that the only social responsibility of a business is building shareholder wealth. While I have criticized Friedman for too narrow a view of corporate social responsibility, at its core his declaration of a company’s social purpose is sound.

The term “purpose” has become a big IN word in discussions about what companies should do for society. It appears explicitly in numerous book titles and a steady stream of articles about what companies need to do to justify their existences. The subtext is that companies with a purpose are superior from a social perspective to companies that only work to create profits for their owners.

My question is, “Why is building shareholder wealth not a valid purpose?” Whether it is done nobly or not is another issue.

The central theme of Firms of Endearment is about achieving business success (call it shareholder wealth building, if you like) by aligning company needs with those of five core stakeholder groups. Notice that I use the term “aligning”, not “balance.”

Times are when investors’ interests take precedence and other times when employees’ or customers’ needs come first. The issue is not who ranks first among stakeholders but does a company operate in a fashion in which no stakeholder gains at the uncompensated expense of other stakeholders.

Firms of Endearment was the first book written for general business audiences about formally making the needs of multiple stakeholder groups a strategic platform for business development and operations. It is a book about sound management, not about what various people might regard as a company’s moral obligations to society.

Companies that base their operations on a multiple stakeholder business model are liberally found throughout “Best Companies to Work for” lists. They enjoy uncommonly low customer turnover and are widely applauded for the positive contributions they make to the communities in which they operate. But none of that means that these companies are driven by abstract moral objectives. Survivability and profitability are their first order of business, as well it should be on behalf of a company’s investors.

But what best serves investors is often wrapped up with what best serves all core stakeholders.

Companies that subscribe to the multiple stakeholder business model tend to experience lower employee turnover, higher productivity, deeper customer loyalty, better relationships with suppliers, stronger community support and lower marketing costs. All that being the case, why wouldn’t a company want to make the multiple stakeholder business model the strategic foundation of its operations?

The answer to that question must be reserved for another post, for it is indeed puzzling why such a sure-fire way of building a company is not more broadly followed. However, I was motivated to write this post after reading yet one more article about how company operations should be rooted in “purpose” with the implication that making a profit for shareholders is not a worthy “purpose.”

That theme has grown tiresome for me.

Besides, what one person may consider a worthy purpose might well be considered by another person as an unworthy purpose.

So, it’s time to begin stop thinking about corporate social responsibility as a moral imperative. Instead, as companies like Costco, Starbucks, Whole Foods, Patagonia and others we researched for Firms of Endearment have found, thinking outside the traditional the investor box can be a great way to build shareholder wealth. And to serve the interests of members of all core stakeholder groups.

The bottom line here is that management best serves shareholders when its actions are aligned with the interests of all stakeholders. There is no need to think about corproate social responsibilty as a separate matter. It's about what makes for sound management that best serves owners' interests. The multiple stakeholder business model does just that.

Comments

I found this to be another thought-provoking post, David, raising valid questions about when corporate leadership might become too consumed by "doing good" at the expense of "doing so profitably." However, I'm trying to understand the strategic implications -- in both camps -- of the recent Supreme Court decision called "Citizens United," wherein corporations now have unlimited latitude to shape public opinion through political advertising. Will this new power bestowed by the Court be used to shape public policies favorable to all stakeholder groups, or will it be employed to improve the bottom line? Will corporations pursue broader public interests or will they engage more in profit-enhancing initiatives such as deregulation, off-shoring of American jobs, and global outsourcing, wherein American suppliers become beaten down by foreign price advantages due to unhealthy foreign labor practices? Did gutting the McCain-Feingold campaign-finance law set up circumstances where "profit" may glow a bit brighter than "purpose" in future corporate strategic planning?

Unfortunately, the Supreme court's recent ruling you refer to is does not place the interests of all core stakeholder groups in alignment -- it has unbalanced the power equation in favor of corporate interests, leaving in a disadvantageous position the interests of the individual stakeholder of greatest concern in a democracy: the individual citizen.

Blogs with a Global Perspective On Marketing

Anita Campbell's Small Business TrendsAnita's blog is a treasure trove of useful information, especially for small businesses who must depend on external sources to identify what is important to them.

Ben McConnell and Jackie HubaHigh priests of customer evangelism, the foundation of viral marketing, Ben and Jackie work creatively from the pulpit of the Church of the Customer to tech companies how to recruit consumers into their marketing efforts.

Brent Green's BoomersBrent’s blog amplifies marketing principles and practices in his book “Marketing to Leading-Edge Baby Boomers.” Commentary ranges from rants about the marketing clueless to exaltation of companies and organizations successfully introducing new Boomer marketing initiatives.

Jean-Paul Treguer's SenioragencyJean-Paul brings a Continental perspective to the art of marketing to people in the second half of life. This entry links directly to the English edition. The French edition is at http://www.jean-paul-treguer.com/. In both editions, lots of down to earth insights and advice.

Saisir l'état d'esprit des 40+Sylvain Desfosses's dedicated efforts to promote a better understanding of the general state of mind of 40+ segment and the strategic implications in marketing and management. In French (no English subtitles!).

MarcomBlogMarcomBlog is a collaborative effort between eight terrific public relations and marketing professionals and students in Auburn University's Department of Communication and Journalism to involve students in conversations with practitioners from around the world.

Mark Willaman's SeniorCareMarketerMark discusses the 'business of aging' with a focus on Internet marketing. In particular, he writes about how companies who market products and services relating to the aging population can increase their online visibility, web site traffic and leads.

Resonance Partnership Blog Marianne Richmond offers insight into connecting marketing and customer experience within the paradoxes of a digital world… with an eye towards neuroscience and behavior theory.

Web Market CentralTom Pick of WebMarketCentral.com shares his advice, commentary, observations, and wisdom on all aspects of online marketing.

Yvonne DiVita's Lipsticking BlogLip-sticking teaches small and medium-sized businesses how to market to women online. Speaking from the perspective of Jane – representative of the women's market – we offer qualified advice, insight, and research on women and the Internet.

Blogs on Sales Theory and Practice

S. Anthony Iannarino - The Sales BlogAnthony's common sense commentary is a treasure trove of insight into sales methods. tools, and theory enriched by an uncommon addiction to reading about everything. (Renaissance personalities make great salespeople and marketers.)